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Do you really have enough to retire?

Using the 4% rule.

CAPE TOWN – Anyone saving for retirement is at some point going to start asking: ‘do I have enough yet’? After all, the whole reason for building up your retirement capital is so that you can eventually put it to use. 

The problem, however, is that nobody actually knows the answer. It is impossible to know exactly how much you will need, because there are three variables in play that nobody can predict: how long you will live, what inflation will be in the future, and what return you will earn on your investments.

The best anyone can do, and good financial planners should tell you this, is make an educated guess. There are broad ranges and guidelines that can be used to give you some idea of what should be enough.

The 4% rule

The most commonly used calculation is the 4% rule. This was first established by financial planner William Bengen 20 years ago.

Using a portfolio that was split 50-50 into US stocks and bonds, Bengen ran a number of calculations using historical data to work out how much of a person’s retirement capital they could safely withdraw every year if they wanted it to last at least 30 years. He worked out that for 95% of the time, an initial withdrawal rate of 4% adjusted every year for inflation would have lasted.

So what does that mean in practice? If you stuck to the 4% rule, how much retirement capital would you need? 

The below table shows the starting monthly income you would receive from different capital amounts if you retired now.


Retirement capital

Monthly income

R1 000 000

R3 333

R2 000 000

R6 667

R3 000 000

R10 000

R5 000 000

R16 667

R7 500 000

R25 000

R10 000 000

R33 333

R12 500 000

R41 667

R15 000 000

R50 000

R20 000 000

R66 667


Income replacement ratio

Most financial planning works on the assumption that you will not need the same monthly income after you retire as you are earning when you are still working. In South Africa, generally it is assumed that you will need to replace 75% of your income.

This is probably something that is not scrutinised closely enough. If you are currently earning R20 000 a month, is R15 000 a month going to be enough just because you are retired?

Certain expenses may be lower certainly, but you still have fixed costs like water, electricity and medical aid that don’t get any cheaper just because you aren’t working any more. A 75% replacement ratio might work for much larger salaries where these fixed costs make up a lower percentage of the whole, but it’s a lot more difficult lower down the scale.

A number of financial planners are rather proposing that we should be working on at least a 90% replacement ratio. If we can achieve that, we can assume that we will be in a good position to maintain our standard of living into retirement.

Putting that into figures, to achieve a 100% replacement ratio, you would need to have saved 25 times your final annual salary if you stick to the 4% rule. For a 90% replacement ratio, you would need to have saved 22.5 times you annual salary.

These numbers are far higher than the 12 times or 16 times your final annual salary that you often hear bandied about. If you stick to the 4% rule, having retirement capital of 12 times your annual salary will actually only give you a replacement ratio 48%.

The below table illustrates the capital you need to have saved to match up with your current salary:


Current monthly salary

Current annual salary

Capital required for 100% replacement

Capital required for 90% replacement

Capital required for 75% replacement

R10 000

R120 000

R3 000 000

R2 700 000

R2 250 000

R15 000

R180 000

R4 500 000

R4 050 000

R3 375 000

R20 000

R240 000

R6 000 000

R5 400 000

R4 500 000

R30 000

R360 000

R9 000 000

R8 100 000

R6 725 000

R40 000

R480 000

R12 000 000

R10 800 000

R9 000 000


These numbers are probably quite sobering to many people. It is unfortunately true that the majority of us underestimate how much we will actually need.

That being the case, rather than asking how much you will need, the more relevant question may be how much you can get with what you have. Next week we’ll look at different scenarios that illustrate how long different amounts will last at various withdrawal rates, in different inflation environments, and at different rates of return.

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